First Way to Approach the Theory, Q = Q(K,N) Choose K and V to maximize profit: = P(Q(K, N)) Q(K, N) rK w(N)N Revenue: p*Q Costs Take derivative using product and chain rule. Set to zero. Labour example: 1. 3030 Q(N, K) + pa-w-w=0 Q 2. If a = 0, 90 w N = = 0w= Q(K, N) N "Marginal Revenue Product" P Intuition: Wages equal to the revenue generated by the last worker hired.